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Are you a tax cheat if you shop online? State sales tax collections bill up for debate

By STEPHEN OHLEMACHER Associated Press

May 6 2013 12:01 am

In this photo made Tuesday, April 30, 2013, Kurt Zentmaier poses in his warehouse full of guitars in Claremont, N.H. Zentmaier is president of Rondo Music which sells its guitars online only and doesn't want an Internet sales tax. (AP Photo/Jim Cole)

The Senate is expected to pass a bill today making it easier for states to collect sales taxes for online purchases. Some of the nation’s largest retailers are rejoicing. But small-business owners who make their living selling products on the Internet worry they will be swamped by new requirements from faraway states.

“It’s a huge burden for a company like ours,” said Sarah Davis, co-owner of Fashionphile.com, a California-based company that sells high-end pre-owned handbags and purses. “We don’t have an accounting department, we’ve got my father-in-law.”

Davis started the company in 1999 and now runs it with her brother-in-law. They have 26 workers and three stores, in Beverly Hills, San Diego and San Francisco. Last year, Fashionphile.com did $10 million in sales, the vast majority of it online, Davis said.

Fashionphile.com sells bags directly from its website and on eBay. The company collects sales taxes from customers who live in California, but not from people who live in other states, Davis said. Under the law, states can only require stores to collect sales taxes if the store has a physical presence in the state.

That means big retailers, such as Wal-Mart, Best Buy and Target, with stores all over the country collect sales taxes when they sell goods over the Internet. But eBay, Amazon and other online retailers don’t have to collect sales taxes, except in states where they have offices or distribution centers.

As a result, many online sales are essentially tax-free, giving Internet retailers an advantage over brick-and-mortar stores.

But the purchases aren’t really tax-free under the law.

In states with sales taxes, if you buy something from an out-of-state retailer and don’t pay taxes, you are supposed to pay those taxes when you file your state tax return, said Neal Osten, director the Washington office of the National Conference of State Legislatures.

Only Delaware, Montana, New Hampshire and Oregon have no sales tax. Alaska has no state sales tax but does have local ones.

Unpaid sales taxes are usually referred to as “use taxes” on state income tax returns. Use taxes apply to purchases made over Internet, from catalogs, television and radio ads and purchases made directly from out-of-state companies. State officials, however, complain that few people pay these taxes, Olsten said.

“I do know about three people that comply with that,” says Sen. Mike Enzi, R-Wyo., the main sponsor of the Senate bill.

Enzi’s bill would empower states to require businesses to collect taxes for products they sell on the Internet, in catalogs and through radio and TV ads. Under the bill, the sales taxes would be sent to the states where a shopper lives.

Businesses with less than $1 million a year in out-of-state sales would be exempt.

The Senate is expected to pass Enzi’s bill today. Already, the measure has survived three procedural votes.

Enlarge Sarah Davis, co-owner of Fashionphile.com in Carlsbad, Calif., is facing the complicated task of dealing with new state regulations on Internet sale taxes. Lenny Ignelzi/AP

Sarah Davis, co-owner of Fashionphile.com in Carlsbad, Calif., is facing the complicated task of dealing with new state regulations on Internet sale taxes.

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